Rule 504 of Regulation D (“Rule 504″) is a transactional exemption from the registration Statement requirements of the Securities Act of 1933, as amended (the “Securities Act”) for non-reporting companies when they offer and sell securities. OTC Pink Sheet companies often rely upon Rule 504 to offer and sell their securities.
Rule 504 Eligibility
Rule 504 is only available to a company of securities and therefore is not available for the re-sale of securities by a shareholder who holds or owns a security. The Rule 504 is only available to a company that is a SEC reporting company (i.e., the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”); an investment company; or a “Shell Company” (i.e., a development stage company that either has no specific business plan or purpose or has indicated that its business plan is to enter into a
merger or acquisition with an unidentified company or companies or other entity).
Maximum Offering Amounts Under Rule 504
The aggregate amount a company can raise in a 504 offering of securities under Rule 504 cannot exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under Rule 504.
Number Of Investors In OTC Pink Sheet Rule 504 Offerings
Rule 504 does not impose a limit on the number of investors who can purchase securities offered by an OTC Pink Sheet issuer.
Blue Sky Laws in Rule 504 Offerings
OTC Pink Sheet Companies must comply with the Blue Sky Laws of the states where offers and sales are made in reliance upon Rule 504.
Rule 504 Informational Requirements for OTC Pink Sheet Issuers
Companies conducting offerings in reliance upon Rule 504 do not have to provide specified information to investors. Rule 504 only provides an exemption from registration under the federal securities laws. Even though there are no specific disclosure delivery requirements, companies should provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information companies provide to investors must be free from false or misleading statements. Similarly, companies should not exclude any information if the omission makes what the issuer provides to investors false or misleading. If the company fails to do so the company and its executive officers and directors may be personally liable to investors in the offering. Rule 504 does not exempt the company or its executive officers and directors from the anti-fraud provisions of federal and state securities laws.
Non-Compliance with Rule 504
If an OTC Pink Sheet company fails to comply with the requirements of Rule 504 and an alternative exemption is not available, the offering will have been made in violation of the securities laws. If this occurs, the investors will be able to rescind their purchase and get their money back from the Company. Further, the Company may become the subject of a State or SEC Investigation or Enforcement Action.
Tradability of Securities in 504 Offerings
To be able to issue free trading shares under Rule 504, the company must conduct offering as follows:
♦ Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions.
♦ In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or
♦ Every state that has an accredited only investor exemption has a corresponding law that requires the securities be restricted. State statutes contain as a condition of the exemption, that investors must purchase “for investment and not with the view to or for sale in connection with a distribution of the security”…any resale of a security sold in reliance on this exemption within 12 months of sale shall be presumed to be with a view to distribution and not for investment, except a resale pursuant to a registration statement”